Retirement planning is an essential part of financial planning. The responsibility of securing our future is predominantly on our judgement of conviction. To ensure that there would be a regular flow of income post retirement, you need to start your retirement planning early. A pension plan, also known as a retirement plan, is an annuity with attributes of capital appreciation.
If you have a long time for your retirement, Mutual funds are ideal for long-term financial planning. Investment in mutual fund pension plans makes you a disciplined investor and your investment has potential of maximum capital appreciation.
At present, unfortunately only two pension funds, UTI Retirement Benefit Pension Fund and Templeton India Pension Plan are available in the market. Both schemes are hybrid in nature having investment in both debt and equity component. These invest up to 40% money in equities and the rest in debt.
Plus, investments in both are eligible for tax exemption up to Rs 1 lakh under Section 80C of the Income Tax Act. As the investment corpus has 40% exposure in equities, handsome returns can be realised in the long term. Investors can either invest lump sum amounts or can choose the route of systematic investment plan (SIP).
However, investing through SIP's to generate sufficient post retirement corpus is a recommended strategy as it has an edge over traditional pension plans and unit linked pension plans.
A new Mutual Fund Linked Retirement Plan (MFLR) proposed by SEBI which wants the government to provide tax incentives and expects annual inflows of over Rs 18,000 crore into capital markets. As per the SEBI proposal, the government can provide tax breaks on an investment up to Rs 50,000 in MFLRPs, otherwise enhance the limit under Section 80C of Income Tax Act to Rs 2 lakh to help such investments become eligible for tax benefits.
MF pension plan is market linked and one can expect around 12% returns in the long run, whereas traditional pension plans give returns of 8% approximately. Many investors may shy away from equity investment given its volatile nature.
However, equity as an asset class gives the best return in the long run. Also remember, in the long run this 4% makes a substantial difference.
It is recommended to have a larger portion invested in equity if you are starting early. This can really help you build a good retirement corpus.
Withdrawal of funds is discouraged before you retire and standard retirement age is taken as 58 years. Post-retirement, based on one’s discretion, investor can make a lump sum withdrawal or opt for regular income (annuity payments). The balance units post withdrawals in either case remain invested and continue to grow.
It is advantageous to start saving and investing at the earliest. The earlier you start greater can you save to create a nest egg for old age. Get professional help so that you can look at all other aspects of retirement planning, thus leading to an independent life thereafter.
The writer is Founder, MD & CEO of Achiievers Equities Ltd